Question

BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.

		Machine A		Machine B
Original cost		$75,900		$181,000
Estimated life		8 years		8 years
Salvage value		0		0
Estimated annual cash inflows		$19,900		$39,800
Estimated annual cash outflows		$5,020		$10,050

Click here to view the factor table.

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

		Machine A		Machine B
Net present value		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Profitability index		enter the profitability index rounded to 2 decimal places		enter the profitability index rounded to 2 decimal places

Which machine should be purchased?

select a machine

Machine AMachine B

should be purchased.

Answer 1

Net Present value
				Machine A	Machine B
Annual cash inflows			19900	39800
Less: Annual cash outflows		5020	10050
Net annual cash flows		14880	29750
Multiply: Annuity PVF at 9% for 8yrs	5.53482	5.53482
Present value of inflows		82358.12	164660.9
Less: Investment			75,900	181000
Net present value			6,458	-16339.1
Profitability Index
				Machine A	Machine B
Present value of inflows		82358	164661
Divide: Investment			75900	181000
Profitability Index			1.09	0.91
Machine A should be purchased